Delaware banks: Wilmington Trust accused of fraud in lawsuit

Wilmington Trust’s stock symbol has disappeared from the New York Stock Exchange now that the company has been swallowed up by M&T Bank Corp. But for some investors, there’s no forgetting — or forgiving.

In an amended federal lawsuit filed against Wilmington Trust and some former officers and directors, investors are alleging a massive securities fraud perpetrated by “one little clan” of top executives who “took the company to the race track” while hiding behind the company’s reputation for stability and safety.

The 179-page complaint filed by five pension funds contains some of the most damning allegations yet by as many as a dozen confidential witnesses, many of them former bank officials, who detailed their experiences during the final years of the bank.

The witnesses allege that a select club, led by former Chairman Ted Cecala and former President Robert V.A. Harra Jr., dispensed loans and favors to businessmen on the basis of personal relationships rather than borrowers’ ability to repay.

Cecala intervened on a loan request by a car dealer friend who ended up with a “very liberal” loan structure, the lawsuit alleges. Attempts by employees to limit risk were rebuffed by the senior officers, according to the filing.

The conduct of the officers now has resulted in a “broad inquiry” by the U.S. Securities and Exchange Commission into the company’s lending and accounting practices, the lawsuit says. Judith Burns, spokeswoman for the SEC, declined to comment.

Wilmington Trust reported earlier this year that the SEC has inquired about matters in its 2009 annual report to the commission and a quarterly filing in 2010 relating to credit review, substandard and nonperforming loans, impaired loans and collateral values.

For his part, Cecala, who left the company a year ago, said the allegations in the lawsuit are “absolutely untrue.”

“That’s just not the way we ran the company,” Cecala said. “It’s the plaintiffs’ perspective in making their argument. I think there are many things in there that are just way out of context.”

A call to Harra, who is now a senior vice president for community and customer relations at M&T, was not returned. Megen Morris, spokeswoman for M&T, said, “As a matter of policy, we do not comment on active litigation.”

Robert Saunders, the attorney for Wilmington Trust and the individually named defendants, declined to comment.

Pressure from Fed

Witnesses cited in the lawsuit portray an institution that had strayed far from its historic conservative image.

According to the lawsuit, things had gotten so bad at Wilmington Trust, the Federal Reserve Board, the institution’s primary regulator, had had to resort to one of its most powerful weapons to bring the company to heel in September 2009.

The company’s lending and accounting practices had become so “egregiously deficient and risky,” the Federal Reserve forced the institution to entirely restructure the way it originated, monitored and accounted for its loans, the filing says.

The regulators also forced Wilmington Trust to fire several senior loan officers and relationship managers who had exposed the bank to significant credit risk, the lawsuit alleges.

Cecala declined to comment on the memorandum of understanding.

Still, within a year of the memorandum being struck, the bank was fighting to avoid a possible meltdown, according to public filings.

The company needed to strike a deal with another bank before the release of its dismal third-quarter financial information or it would likely suffer “a material decline in the value of its common stock” and be subject to significant regulatory action, the company said in a proxy statement.

On Nov. 1, Wilmington Trust announced it would be taken over by M&T for $351 million in stock or $3.84 a share. The sale was completed on May 16. The so-called take-under announcement stunned many in the community, including Cecala, who said he had not sold his stock.

“I looked to see what the earnings release was online” and learned of the sale, Cecala said.

Little disclosure

The sale left investors, customers and others in Delaware struggling for answers.

“It just took your breath away that an institution so strong deteriorated to almost nothing,” said Herschel Quillen, president of H. H. Quillen & Co. in Greenville, a real-estate advisory services company. “There was really very little disclosure of problems in their commercial loan portfolio.”

According to the lawsuit, the problems rest mostly with Cecala and Harra, former Chief Financial Officer David Gibson and former Chief Credit Officer William North.

A call to Gibson, who is helping with the transition at M&T, was not returned. North, who left Wilmington Trust, could not be reached for comment.

A confidential witness who was a director of tax at Wilmington Trust from 2004 to 2009 described the group as “one little clan” who are “all friends and go back a long way.”

“Many times these defendants were the sole decision makers on issues that directly impacted the quality of the bank’s portfolio,” the lawsuit alleges.

According to a confidential witness, the bank was involved in aggressive high-risk lending as early as 2007, the lawsuit says.

A former vice president of the credit risk management division, who left Wilmington Trust in March 2010 after 13 years, said the bank had an internal annual goal of 10 percent growth throughout his tenure.

“This ambitious growth goal required a constant bank-wide focus on sales and business development,” the lawsuit alleges.

“In fact, in an effort to generate new loans and drive revenues, loan officers … frequently ignored even the few established underwriting processes that existed and originated loans based on informal exceptions to the bank’s standards,” according to the lawsuit.

Cecala said the company didn’t run like that.

“If we were interested in high-risk lending, we would have gone to Florida and other parts of the country where a lot of lending was going on,” he said.

Favored clients

Senior officers also stressed the importance of relationships over the scrutiny of loans, the lawsuit alleges.

A former Wilmington Trust paralegal with the bank said the institution “went to great lengths to get loans through” for favored clients and would “often rewrite a loan that a client didn’t qualify for,” the lawsuit alleges.

Another witness, who sat on the credit review committee, described how the “same cast of characters” with “longstanding ties to the bank,” including certain developers from Kent and Sussex counties, would receive a significant portion of the bank’s loans regardless of whether they had the “wherewithal to make the loans current,” according to the suit.

One confidential witness described how a former loan officer, who was terminated in 2010 as a result of the Federal Reserve memorandum, consistently gave loans to a client despite the fact the borrower was frequently in overdraft and financially unstable, the lawsuit says.

Wilmington Trust would “shuffle things around” for this preferred client, according to the witness quoted in the lawsuit.

“That didn’t happen,” Cecala said.

Personal ties

Wilmington Trust also developed an overreliance on personal guarantees when making loans without performing adequate due diligence on the person who guarantees the debt, according to the suit.

The bank’s overreliance on personal guarantees “epitomized the bank’s disastrous dependence on personal relationships to the exclusion of prudent credit underwriting,” the lawsuit says.

The suit mentions a series of loans given to Sussex County real-estate developer Preston Schell. Wilmington Trust relied upon personal guarantees from Schell to justify loans the bank gave to various entities, despite the fact that Schell “did not have a great deal of liquidity and was already the guarantor on numerous other” Wilmington Trust loans, the lawsuit alleges.

Schell said he has no comment.

In another case, Wilmington Trust gave a one-year, $4.1 million home loan to Christopher Tigani, who at the time ran N.K.S. Distributors, a liquor business that was a “substantial” client of Wilmington Trust, the suit says. The bank granted the loan despite acknowledging that Tigani was highly leveraged and had already personally guaranteed more than $30 million in Wilmington Trust loans to N.K.S., the lawsuit says.

Tigani declined to comment.

Cecala said Thursday the bank didn’t have an overreliance on personal guarantees. They were simply part of the lending policy.

Risks disputed

When it came to monitoring credit risk, the group of senior officers undermined the asset review group, the lawsuit says.

The review group met each month to discuss loan rating changes, charge-off decisions and credit-risk reviews. Cecala and Harra would attend the meetings and challenge the group’s conclusions, the filing says. They became “increasingly combative in rejecting proposals to downgrade loan ratings.”

Cecala and Harra would routinely object on the grounds that “these are good guys” or “we are not going to get hurt by this client,” a witness alleges in the lawsuit.

“Cecala and Harra would demand that the group not make any downgrades to these loans but ‘just make it better,’ ” the lawsuit said.

The witness recalled a meeting in the second quarter of 2009 that involved $79 million in loans that were extended to an unnamed prominent housing developer in southern Delaware.

The asset review group had determined that the loans needed to be downgraded because they were based on outdated appraisals, according to the lawsuit. After more than an hour of discussion, Cecala insisted that the loan rating not be changed, the suit alleges.

Cecala said these allegations are “just absurd.” The officers always had questions because that’s their job, Cecala said, but “we wouldn’t tell people to do something wrong.”

Assurances

Finally, when the bank announced that Cecala was immediately retiring as chief executive, the officers issued misleading statements to prevent a further decline in the stock price, the lawsuit alleges.

At an investor conference call held to discuss the announcement, Cecala assured analysts that his resignation did not indicate the bank had growing capital or credit problems, the suit says.

Instead, Cecala said that “considering the strength of our financial condition,” it was the right time to make a “make the transition to new leadership,” the lawsuit says.

“That’s exactly my belief at that point in time,” Cecala said Thursday.

Within months, the bank was scrambling to find a buyer.

Investors are requesting a jury trial in U.S. District Court in Wilmington. They are asking for damages plus interest.

Maureen Milford, Delaware Online, June 5, 2011

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  1. May 16, 2013
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